I am a share-holder in Max Resource Corp (TSXV:$MXR), and I can confidently answer 'yes' to the following questions:
Q1) Am I excited at the prospect of a significant gold discovery through MXR's 'Choco Precious Metals Project'? - Yes.
Q2) Do I have hesitations about this project? - Yes.
This article is my first, and through research on both MXR and the Choco region of Colombia I will outline the underlying facts that motivate my answers to the above two questions. Some calculations to estimate gold production will also be provided. Throughout this article numbers e.g. '[1]' denote references for which original sources are provided under the 'References' section at the end of this article.
MXR's 'Choco Precious Metals Project'
Max Resource Corp's 'Choco Precious Metals Project' is an exploration-phase project in the Choco department of Colombia ('department' is the Colombian term for a sub-region in the country; it is the equivalent to a 'county', 'state' or 'province' as designated in other countries). The project covers a total of 1,757 sq. km, for which MXR owns 100% of 82 license applications, and 50% of 7 mineral license applications [1]. The region intersects with the Novita mining project property, which is owned by Condoto Platinum Ltd. An initial agreement between MXR and the owner of Condoto Platinum Ltd., Noble Metals Ltd. ($NOB) for MXR to acquire 100% of Condoto Platinum Ltd. has been proposed and is likely to be approved through a shareholder vote at MXR's April 2019 AGM [2].
The Choco Department of Colombia - Gold in Numbers
The Choco region is the second largest producer of gold in Colombia, second only to the department of Antioquia. The region itself covers a total of 46,530 sq. km. In 2015 the region produced 15.547 tonnes of gold, constituting 26.3% of Colombia's total gold production that year [3]. The recent ten-year high for gold production in the region came in 2011, where it produced 27.9 tonnes of gold. The region is also rich in platinum deposits. Here it excels, producing 99% of Colombia's total platinum production.
The Choco is re-known for historic rates of high-grade gold, most notably through a company known as Compania Minera Choco Pacifico which operated under this name between 1916-1974; it was later sold-off. The company was the result of a merger between the US based Granger Mining Company with the British Anglo Colombian Gold development at the end of the 19th century. It is reported that in the period 1906 - 1990, the subset of the property owned by Choco Pacifico which now contains the aforementioned Novita property produced a total of 605,110 Oz of gold [4]. In today's money this would be worth approximately $1b CAD, assuming the current price of gold at $1,700 CAD / Oz.
The Choco department is further sub-divided into several municipalities and the licensed area covered by MXR's project intersects several of these, including: Condoto, Novita & Medio San Juan. I have surmised this from slide 8 of MXR's Feb 2019 presentation [1]. For reference, the pie-chart shown below in Figure 1 shows a break-down of gold production by Choco municipality for the year 2016 [5].
Figure 1: Breakdown of gold production by Choco department municipality [4].
About 90% of all gold production in the Choco comes from alluvial operations. The extraction of gold from alluvials is targeted by MXR's project. Geologically speaking, alluvials are made up of a variety of materials, including fine particles of silt and clay and larger particles of sand and gravel. When loose alluvial material is deposited or cemented into a lithological unit, or lithified, it is called an alluvial deposit. The gold-containing alluvials of the Choco region are therefore close to the surface of the ground-level. The resulting economics of this is that the gold bearing material is readily accessible. In principle this reduces the operational cost to extract it and consequently the threshold grade (e.g. in units of grams / tonne of material 'g/t') of gold required for an operation to be profitable is reduced. One recent example came from Bezant Resources Plc. which operated in the Choco in 2017. Bezant operated in an area north of MXR's licensed region. After analyzing 32.9 tonnes of materials aggregated over 35 samples from 14 individual pits, Bezant determined an average weighted combined grade of platinum and gold of 0.235 g/t. An independent scoping assessment on the required grade to be profitable was determined to be 0.17 g/t. These grades are perhaps an indicator of the range of grades to be expected from their upcoming pit results.
The Choco, Colombia - Unfortunate Truths
The department of Choco bears a lot of gold. Unfortunately, as a result the susceptibility of the department to corruption and illegal practices (including gold mining) in the department is immense. This creates a huge problem for both the state Colombia and state-sponsored relationships with international companies intending to setup mining operations in the area. Illegal armed groups such as the revolutionary 'people's army' (FARC), the national liberation army (ELN) and former sub-groups of the United self-defense Forces of Colombia (AUC), collectively known as 'BACRIM' all operate in the area. Small-scale mining operations are located throughout the Choco, and generally consist of indigenous communities which operate mining practices using traditional methods such as panning. The illegal armed groups extort these mining operations, imposing a 'tax' on the movement of equipment and gold to nearby departments such as Medellin.
To give an idea of the struggle for legitimate mining operations to succeed in the region, consider the following fact:
- Between 2002 - 2012 mining authorities delivered 47 mining titles within the Choco department, representing more than 180,000 hectres. None of the large-scaling mining companies which hold mining titles have begun the exploitation phase in Choco [3]
The reason why? Well, there is an obligation to consult with indigenous and Afro Colombian populations of the region prior to commencing mining operations. Unfortunately many of these populations are under the rule of the aforementioned illegal armed groups (FARC, ELN, BACRIM). Indeed, many of the companies awarded mining titles eventually renounce their titles, or sell off their properties. In our previous example, Bezant Resources Plc. eventually sold their Choco project for $0.5M USD in April 2018.
Another fact to consider is the following:
- There are no international traders, refiners and smelters present in Choco.
Some other facts to consider relate to the physical geography of the Choco region itself; it is primarily covered in jungle, and is statistically one of the wettest places on earth. It is heavily isolated from the rest of the Colombia and a single road connects it to routes in- and out-of the department. Logistically this poses challenges to mining operations within the region.
Max Resource Corp. - Best Team for the Job
The concerns outlined above are legitimate, and something that MXR will need to work against in order to make their project successful. However, MXR does have a strong team behind them as outlined on slides 3/4 of their February 2019 presentation [1]
Brett Matich, CEO - as CEO of Aztec Resources (AZR) identified & helped develop the Koolan hematite deposit, AZR went from $1M market cap through to a $300M merger.
Dr. Chris Grainger, Colombian Geology Expert - Dr. Grainger resides in Medellin, Colombia and was the Vice President Exploration (Regional Projects) for Continental Gold and Chief Geologist for Colossus Minerals Inc. Additionally, Dr. Grainger has held senior level positions at Troy Resources, LionOre Australia, INCO Brazil and CVRD Brazil.
One thing to note here is Dr. Grainger's involvement with Continental Gold. This company had a similar project to MXR in the Choco region, known as their 'Dojura' project. The 'Dojura' project seeked to extract gold from alluvial deposits. The company engaged in a joint venture with AngloGold in 2008. Unfortunately by 2014 the relationship between the two companies had dissolved and Continental Gold was left to continue negotiations alone with the local indigenous population about prospective mining in the area. Security concerns about the project are documented, and go back as far as 2010 [7]. As of 2018 progress has been in a stand-still [8] - it is possible it is related to issues that affect the Choco region overall, as previously described.
Alex Andres Trivino –Advisory Board - Mr. Trivino, a Colombian national located in Toronto, is the President of the Canadian Colombian Chamber of Investment of Trade.He is fluent in 3 languages and has 21 years of professional experience with international firms, including; BP Amoco PLC, ABN AMRO Bank and most recently, Price Waterhouse Coopers Canada where he advised clients in Canada, United States, Mexico, Cuba, Dominican Republic, Venezuela, Brazil and Colombia.
Dario Cujar, M.Eng –(Ex -Choco Pacific) - Mr. Cujaris Novita onsite (Mining Engineer.). He was previously senior Mining Engineer for Choco Pacific. He is established in Novita area onsite for MXR.
The above names constitute a larger team (see original slides of presentation [1]). The names I have chosen though I think, overall, illustrate a combination of success and local expertise. The latter is particularly important as I think the socio-economic and illegal practises that are rife within the Choco region are the biggest barrier to a successful operation; local knowledge here is a key asset whenever an international company enters the region.
Calculations
There are several approaches one may adopt to estimate the potential gold production numbers for MXR's 'Choco Precious Metals Project'. The company has reported the dimensions of their 6 initial test sampling pits with dimensions 2m x 2m x 0.5 m with each cubic metre of conglemorate being 2.2 tonnes. This can lead one to estimate 'millions' of Ounces of gold over the full property. However this mathematically-centric calculation negates many factors such as extraction efficiency and continuity of the gold through the region. Instead, I will adopt the average statistics as quoted by Choco's gold production in 2015 above.
Estimated Gold Prod / Year := 15.547 x 1e6 x (1,757/46,530) x (1/31.1035) := 18,874 Oz / Year
Value of Gold / Year := 18,874 Oz * $1,700 CAD = $32,085,800 CAD / year
where:
15.547 - Gold Production (tonnes) of Choco in the year 2015
1e6 - Conversion factor of tonnes into grams
(1,757/46,530) - Fraction of total Choco land (sq. km) licensed to MXR for gold exploration
(1/31.1035) - Conversion factor of grams to Troy Ounces.
$1,700 CAD - At time of writing approximate value of gold / Oz.
Hence, one could expect a gold production rate of ~ 18,874 Oz / year. Of course, the entirety of the 1,757 sq. km may not be eligible for mining. Indeed, it may be very difficult to get the gold out and on the road to Medellin or Cali. Hence, even if, say only 25% of the potential gold is realized, that still equates to ~ $8M CAD / year. Given the current company is valued at < $20M CAD @ 0.30 CAD / share - I consider MXR undervalued right now.
Conclusion
I am cautiously optimistic of MXR to be able to pull off a successful operation in the Choco. There is no question as to the potential high-grade gold bearing alluvials contained within MXR's licensed exploration region. However, I have found it difficult to find recent examples of successful mining operations in the Choco. This is no doubt attributed to security concerns. Given that MXR is seeking a buy-out from a mining operator, in such an eventuality I could see their buy-out price beinging impacted due to said security concerns rife throughout the region. As such, it would not surprise me if MXR fail to achieve their goal. Therefore I am bearish somewhat and will be prepared to pull profits from my investment should the share price approach a good price.
To those in MXR, good luck to you all.
Please note: the above article does not constitute a recommendation to buy MXR shares. All potential investors invest at their own risk.
References
[1] - Max Resource Corp February 2019 'webinar' presentation - http://www.maxresource.com/resources/MXR_Presentation.pdf?
[2] - Condoto Platinum Ltd. - Novita Property - https://www.juniorminingnetwork.com/junior-miner-news/press-releases/2534-tsx-venture/mxr/48377-max-resource-to-acquire-gold-properties-in-colombia-historic-production-of-605-110ozs.html
[3] OECD Report on due dilligence on gold production in the Choco - https://mneguidelines.oecd.org/Choco-Colombia-Gold-Baseline-EN.pdf
[4] Max Resource Copr Tweet - https://twitter.com/maxresourcecorp/status/1081242333356666880
[5] Colombian Mining Information System (SIMCO), 2016.
[6] Bezant Resources New Release (April, 2017) - https://www.marketscreener.com/BEZANT-RESOURCES-PLC-4006345/news/Bezant-Resources-Phase-2-Gold-Platinum-Recovery-Results-24161016/
[7] Continental Gold End of Year Statement - https://www.continentalgold.com/wp-content/uploads/2016/02/20101231_AIF_YearEnd.pdf
[8] Continental Gold End of Year Statement - https://www.continentalgold.com/wp-content/uploads/2019/03/CGI_Q4_2018_Annual_MDA.pdf
